The Effect Of Prime Rate Increases On Your Payment - Best Mortgage Broker Rates

The Effect Of Prime Rate Increases On Your Payment

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If you are worried about rising mortgage rates than you are not alone. Fixed mortgage rates have increased by more than 3% since September 2021. Prime rate has increased by 1.25% since March with more rate increases on their way.

All in all, prime rate is expected to increase by another 1.50% to 2.00% before it finally reaches it’s peak (I’ll be discussing this in detail in next week’s blog).

What Affect Will This Have On Your Payment?

If you are currently in a variable rate with floating payments (adjustable rate) which is the case with most lenders, then your payments will change with prime rate.

Each 0.25% increase to prime rate will increase your payment by roughly $12.50 for every $100,000 you owe.

Below is a chart outlining the effect of each 0.25% rate increase on a $500,000 mortgage:

Rate Increase Payment Increase

0.25% $62

0.50% $125

0.75% $187

1.00% $250

1.25% $312

1.50% $375

1.75% $437

2.00% $500

I’ve left the pennies off in the above example since the exact amount of the payment increase can vary marginally depending on your current rate and amortization. Even if the higher payments are manageable, watching your payment increase every few months is not pleasant. A variable rate mortgage can still be a great option, but you need to be mentally prepared for the further rate increases to come.

I would also highly recommend reading the following of my recent blogs:

Are You Worried About Rising Mortgage Rates?

Are Fixed Mortgage Rates Now The Way To Go?

Should You Convert Your Variable Rate Into A Fixed?

How Many Rate Hikes Will It Take To Lose With A Variable Rate?

Conclusion

As I’ve been saying in my blogs for a while now, we can expect rate cuts to follow the increases. It’s expected that this will happen at some point in 2024. The rapid increases to rates will almost certainly force us into a recession. At which point, the Bank of Canada will need to shift its focus to protecting the economy by lowering their rate.

The faster the and more aggressive the Bank of Canada is with their rate increases, the sooner they will need to come through with a cut. While the ride up isn’t enjoyable, the future ride down will be fun times for anyone in a variable rate mortgage at that time.

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Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank – How to Win The Mortgage Game in Canada, and has ranked as one of the top 75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage Broker of the Year in 2018 - 2021, 2023, and can be seen as the exclusive mortgage broker on season 2, 5-7 of TV’s Top Million Dollar Agent.(Global, Slice TV and Rogers)